PRUDENTIAL NORMS FOR CLASSIFICATION,VALUATION AND OPERATION OF

INVESTMENT PORTFOLIO BY BANKS

-Abhishesh Suman 11020241069-Kuldeep Joshi 11020241114-Mehul Mandge 11020241088

04/09/2023 Prudential Norms for Investments by Banks 2

Investment Policy

• Frame Investment Policy and obtain Board’s Approval• Must include Primary Dealer activities also• Banks may sell a government security already contracted for

purchase• Scheduled Commercial Banks and Primary Dealers have been

permitted to short sell Government securities• The settlement of all outright secondary market transactions

in Government Securities will be done on a standardized T+1 basis

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Investment Policy contd..

• Investment in equity shares/debentures should observe following guidelines

1. Expertise in equity research 2. Transparent policy and procedure for investment in shares 3. The Investment Committee should be held accountable for

the investments made by the bank.

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Ready Forward Contracts in Government Securities.

• Forward contract in Dated securities and Tbills of Govt. of India and Dated securities by State governments.

• All ready forward contracts shall be reported on the Negotiated Dealing System

• All ready forward contracts shall be settled through the SGL Account / CSGL Account maintained with the RBI, Mumbai with CCIL

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Transactions through SGL account

• The transfer of securities takes place simultaneously, with the transfer of funds, So it is mandatory to maintain current A/C with RBI.

• Bounce for want of sufficient funds in SGL a/c should never happen

• SGL transfer forms should be signed by two authorized officials of the bank

• If the bouncing of the SGL form occurs thrice, the bank will be debarred from trading with the use of the SGL facility for a period of 6

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Use of Bank Receipt (BR)

• NO BR should be issued when SGL a/c facility is available.• No BR should be issued on the basis of a BR of other bank and

no transaction should take place by exchange of BR.• No BR should remain outstanding for more than 15 days.• All transactions of issue and receipt of BR should be

maintained separately

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Internal Control System

• There should be a clear functional separation of (i) trading, (ii) settlement, monitoring and control and (iii) accounting.

• Portfolio Management Scheme• Deal slip for every transaction containing name of

counterparty , nature of deal, amount ,date, time must be mentioned

• Balances as per bank's books should be reconciled at quarterly intervals

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Internal Control System contd..

• Bouncing of SGL transfer forms issued by selling banks should be brought to notice of the Regional Office of Department of Banking Supervision of RBI

• Report to the top management, on a weekly basis• Audit the transactions in securities on an on going basis

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Engagement of brokers

• Transactions between one bank and another bank should not be put through the brokers' accounts

• If broker is used, role of broker is that of bringing two parties to deal together.

• A panel of brokers must be prepared with the approval of top management

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Audit, review and reporting of investment transactions

• Half-yearly review (as of 30 September and 31 March) of their investment portfolio

• Copy of the review report put up to the Bank's Board, should be forwarded to the RBI

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What are non-SLR securities?

• As part of prudential guidelines, central banks require lenders to maintain a portion of their deposits in liquid assets

• These liquid assets can be cash, gold or government securities. The ratio of prescribed liquid investments to deposits is termed as statutory liquidity ratio

• In India, banks invest in bonds issued by the government and notified by the Reserve Bank of India as qualifying for SLR to meet the prescribed ratio.

• Currently, the prescribed statutory liquidity ratio for banks is 23% of their deposits

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Non-SLR Securities

• Various Capital market instruments such as stocks and bonds issued by public and private sector companies and commercial papers

• Various Mutual Fund Schemes• But no compulsion on Banks to invest in these securities

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Non- SLR investments

• Appraisal -deficiencies in the appraisal of privately placed issues when investments are done in privately placed unrated bonds

• Disclosure requirements in offer documents Minimum disclosure standards

• Internal assessment a) prudential limits on investments in bonds and debentures including cap and on private placement basis, sub limits for PSU bonds, corporate bonds, guaranteed bonds, issuer ceiling, etc.

b) Investment proposal should of same risk like loansc) proper risk management systems and remedial measures in time

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Non- SLR investments contd..

• Regulatory requirements-• Not invest in Non-SLR securities of original maturity of less

than one-year, other than Commercial Paper and Certificates of Deposits, which are covered under RBI guidelines.

• Due diligence in respect of investments in non-SLR securities.

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Listing and rating requirements

• Must not invest in unrated non-SLR securities.• Banks may invest in unrated bonds of companies engaged in

infrastructure activities, within the ceiling of 10 per cent.• Investment are made only in listed debt securities of

companies which comply with the requirements of the SEBI.

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Prudential Limits

• Investment in unlisted non-SLR securities should not exceed 10 per cent of its total investment in non-SLR securities

• Only investment in units of such mutual fund schemes, which have an exposure to unlisted securities of less than 10 per cent of the corpus of the fund, will be treated on par with listed securities.

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Limits on Banks' Exposure to Capital Markets

• Exposure of a bank should not exceed 40 per cent of its net worth

• The aggregate direct exposure by way of the consolidated bank’s investment in shares, convertible bonds / debentures, units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) should not exceed 20 per cent of its consolidated net worth.

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Role of Boards (Non-SLR Securities)

• All investment policies duly approved by Board of Directors• These securities to be given risk weights• Thus Proper risk management systems for capturing and

analysing the risk in respect of non-SLR investment and taking remedial measures in time

• Should review following aspects at least quarterly– Total business (investment and divestment) during the

reporting period. – Extent of non-performing investments in the non-SLR

category

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Portfolio Management on behalf of clients

• The general powers vested in banks to operate PMS and similar schemes have been withdrawn

• No bank should, therefore, restart or introduce any new PMS or similar scheme in future without obtaining specific prior approval of the RBI

• However, bank-sponsored NBFCs are allowed to offer discretionary PMS to their clients, on a case-to-case basis

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Portfolio Management on behalf of clients

• But those Banks that do take permission for PMS need to follow these guidelines strictly:– PMS should be entirely at the customer's risk, without

guaranteeing, either directly or indirectly, a pre-determined return

– Funds should not be accepted for portfolio management for a period less than one year.

– There should be a clear functional separation of trading and back office functions relating to banks’ own investment accounts and PMS clients' accounts

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Portfolio Management on behalf of clients

• Violation will include– deterrent action against the banks – It includes raising of reserve requirements – withdrawal of facility of refinance from the RBI – denial of access to money markets – prohibition from undertaking PMS activity

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Classification

• The entire investment portfolio of the banks (including SLR securities and non-SLR securities) should be classified under three categories – Held to Maturity – Available for Sale – Held for Trading

• Banks should decide the category of the investment at the time of acquisition and the decision should be recorded on the investment proposals

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Classification (contd.)

• Held to Maturity (HTM)– The intention is to hold the securities till maturity– Max 25 % of total investments

• Held for Trading (HFT)– Intention to profit from short term price/interest rate

movements– Need to be sold within 90 days

• Available for Sale (AFS)– The securities which do not fall within the above two

categories will be classified under ‘Available for Sale’

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Classification (contd.)

• Max 25% for HTM• Rest 75% - Freedom to Bank to decide on the extent of

holdings under HFS and AFS• Profit or loss on sale of investments in both the categories will

be taken to the Profit & Loss Account • Banks may shift investments to/from HTM with the approval

of the Board of Directors once a year • Normally at the beginning of the year.• No further to/from shifting HTM will be allowed during

remaining part of accounting year

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Valuation

• Held till Maturity– No need for MTM (Mark to Market). To be carried at

acquisition cost and premium to be amortized, in case.

• Held for Trading– MTM monthly or more frequently

• Available for Sale– MTM quarterly or more frequently

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Valuation• Unquoted SLR securities

– Central Government Securities (YTM rates put out by FIMMDA)– State Government Securities (25bps above CGS)– Other ‘approved’ Securities (25bps above CGS)

• Unquoted Non-SLR securities– Debentures/Bonds (YTM basis)– Zero coupon bonds (ZCBs) (Carrying Cost)– Preference Shares (Mark up above YTM of CGS)– Equity shares (MTM – preferably on a daily basis)– Mutual Fund Units ( Stock exchange Quotations)– Commercial Paper (Carrying Cost)

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Non-Performing Investments (NPI)

• Those investments where interest/principal are in arrears for more than 90 days

• The banks should not reckon income on the securities• Appropriate provisions for the depreciation in the value of the

investment

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Uniform accounting for Repo / Reverse Repo transactions

• To impart an element of transparency• However, repo / reverse repo transactions under the Liquidity

Adjustment Facility (LAF) with RBI are currently excluded• The securities sold under repo are excluded from the

Investment Account of the seller of securities• The securities bought under reverse repo are included in the

Investment Account of the buyer of securities• The interest expenditure/income due to repo/reverse repo

should be included in P&L

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Thank You…

Any Questions?